Note 11. Income Taxes
The following table presents the domestic and foreign components of loss before provision for income taxes for the periods presented (in thousands):
|
|
|
For the year ended |
|
|||||||||
|
|
|
January 31, |
|
|||||||||
|
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|||
|
United States |
|
$ |
(44,977 |
) |
|
$ |
(38,926 |
) |
|
$ |
(46,850 |
) |
|
Foreign |
|
|
2,820 |
|
|
|
2,167 |
|
|
|
1,029 |
|
|
Loss before provision for income taxes |
|
$ |
(42,157 |
) |
|
$ |
(36,759 |
) |
|
$ |
(45,821 |
) |
The provision for income taxes is composed of the following (in thousands):
|
|
|
For the year ended |
|
|||||||||
|
|
|
January 31, |
|
|||||||||
|
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|||
|
Current income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
State |
|
|
116 |
|
|
|
82 |
|
|
|
22 |
|
|
Foreign |
|
|
4,248 |
|
|
|
976 |
|
|
|
308 |
|
|
Total current income taxes |
|
|
4,364 |
|
|
|
1,058 |
|
|
|
330 |
|
|
Deferred income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(26 |
) |
|
|
13 |
|
|
|
5 |
|
|
State |
|
|
7 |
|
|
|
1 |
|
|
|
— |
|
|
Foreign |
|
|
(2,697 |
) |
|
|
(224 |
) |
|
|
— |
|
|
Total deferred income taxes |
|
|
(2,716 |
) |
|
|
(210 |
) |
|
|
5 |
|
|
Total provision for income taxes |
|
$ |
1,648 |
|
|
$ |
848 |
|
|
$ |
335 |
|
The effective tax rate differs from the federal statutory rate as follows:
|
|
|
For the year ended |
|
|||||||||
|
|
|
January 31, |
|
|||||||||
|
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|||
|
Federal statutory income tax rate |
|
|
33.8 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
Tax reform rate change impact |
|
|
(80.7 |
) |
|
|
— |
|
|
|
— |
|
|
State tax, net of federal benefit |
|
|
2.6 |
|
|
|
2.6 |
|
|
|
2.7 |
|
|
Change in valuation allowance |
|
|
(23.6 |
) |
|
|
(36.2 |
) |
|
|
(32.0 |
) |
|
Stock-based compensation |
|
|
63.5 |
|
|
|
(2.7 |
) |
|
|
(6.3 |
) |
|
Other non-deductible items |
|
|
(3.5 |
) |
|
|
(1.8 |
) |
|
|
(0.4 |
) |
|
Foreign rate differential |
|
|
(0.5 |
) |
|
|
(1.4 |
) |
|
|
(0.4 |
) |
|
Tax credits |
|
|
4.5 |
|
|
|
3.2 |
|
|
|
1.7 |
|
|
Total |
|
|
(3.9 |
)% |
|
|
(2.3 |
)% |
|
|
(0.7 |
)% |
The difference between the U.S. federal statutory tax rate of 33.8% and the Company’s effective tax rate in all periods presented is primarily due to a full valuation allowance related to the Company’s U.S. and Canada deferred tax assets offset by foreign tax expense on the Company’s profitable foreign operations.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table presents the significant components of the Company’s deferred tax assets and liabilities for the periods presented (in thousands):
|
|
|
As of January 31, |
|
|||||
|
|
|
2018 |
|
|
2017 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
61,671 |
|
|
$ |
49,100 |
|
|
Accruals and reserves |
|
|
3,161 |
|
|
|
1,164 |
|
|
Stock-based compensation |
|
|
4,476 |
|
|
|
3,388 |
|
|
Tax credits |
|
|
5,636 |
|
|
|
2,233 |
|
|
Gross deferred tax assets |
|
|
74,944 |
|
|
|
55,885 |
|
|
Valuation allowance |
|
|
(58,027 |
) |
|
|
(54,615 |
) |
|
Total deferred tax assets, net of valuation allowance |
|
|
16,917 |
|
|
|
1,270 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Fixed assets and intangibles assets |
|
|
(1,495 |
) |
|
|
(1,072 |
) |
|
Discount of convertible notes |
|
|
(14,803 |
) |
|
|
— |
|
|
Gross deferred tax liabilities |
|
|
(16,298 |
) |
|
|
(1,072 |
) |
|
Net deferred tax assets |
|
$ |
619 |
|
|
$ |
198 |
|
A valuation allowance is provided for deferred tax assets where the recoverability of the assets is uncertain. The determination to provide a valuation allowance is dependent upon the assessment of whether it is more likely than not that sufficient future taxable income will be generated to utilize the deferred tax assets. Based on the weight of the available evidence, which includes the Company’s historical operating losses, lack of taxable income, and the accumulated deficit, the Company provided a full valuation allowance against the U.S. and international deferred tax assets resulting from the tax loss and credits carried forward. The valuation allowance increased by $3.4 million, $13.1 million and $14.6 million during the years ended January 31, 2018, 2017 and 2016, respectively.
As of January 31, 2018, the Company had net operating loss carryforwards of approximately $253 million and $140 million available to reduce future taxable income, if any, for federal and state income tax purposes, respectively. The U.S. federal and California state net operating loss carryforwards will begin to expire in 2026 and 2029, respectively.
As of January 31, 2018, the Company had research and development credit carryforwards of approximately $6.1 million available to reduce its future tax liability, if any, for each of federal and California state income tax purposes. The federal credit carryforwards begin to expire in 2031. California credit carryforwards have no expiration date. As of January 31, 2018, the Company has U.S. federal foreign tax credits carryforwards of $1.9 million that will begin to expire in 2025.
Federal and state laws impose restrictions on the utilization of net operating loss carryforwards and R&D credit carryforwards in the event of a change in ownership of the Company, which constitutes an ‘ownership change’ as defined by Internal Revenue Code Section 382 and 383. The Company experienced an ownership change in the past that does not materially impact the availability of its net operating losses and tax credits. Should there be ownership change in the future, the Company’s ability to utilize existing carryforwards could be substantially restricted.
The Company accounts for uncertainty in income taxes in accordance with ASC 740. Tax positions are evaluated in a two-step process, whereby the Company first determines whether it is more likely than not that a tax position will be sustained upon examination by the tax authority, including resolutions of any related appeals or litigation processes, based on technical merit. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognized in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
The following table summarizes the activity related to unrecognized tax benefits (in thousands):
|
|
|
For the year ended |
|
|||||||||
|
|
|
January 31, |
|
|||||||||
|
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|||
|
Unrecognized tax benefit—beginning of year |
|
$ |
5,441 |
|
|
$ |
3,304 |
|
|
$ |
2,846 |
|
|
Gross increases —prior year tax positions |
|
|
|
|
|
|
472 |
|
|
|
6 |
|
|
Gross decreases —prior year tax positions |
|
|
(5 |
) |
|
|
(248 |
) |
|
|
— |
|
|
Gross increases — current year tax positions |
|
|
7,227 |
|
|
|
1,913 |
|
|
|
452 |
|
|
Unrecognized tax benefit—end of year |
|
$ |
12,663 |
|
|
$ |
5,441 |
|
|
$ |
3,304 |
|
As of January 31, 2018, $8.0 million of the unrecognized tax benefits was accounted for as a reduction in the Company’s deferred tax assets. All but $122,000 of the unrecognized tax benefits as of January 31, 2017 are accounted for as a reduction in the Company’s deferred tax assets. Due to the Company’s valuation allowance, only $4.6 million of the $12.7 million of unrecognized tax benefits would affect the Company’s effective tax rate, if recognized. The Company does not believe it is reasonably possible that its unrecognized tax benefits will significantly change in the next twelve months.
The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense. There was immaterial accrued interest and penalties related to unrecognized tax benefits as of January 31, 2018 and 2017.
The Company’s material income tax jurisdictions are the United States (federal) and California. As a result of net operating loss carryforwards, the Company is subject to audits for tax years 2006 and forward for federal purposes and 2009 and forward for California purposes. There are tax years which remain subject to examination in various other jurisdictions that are not material to the Company’s financial statements.
On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to a corporate tax rate decrease from 35% to 21%, effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of January 31, 2018. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Act, the Company revalued its ending net deferred tax assets at January 31, 2018, which were fully offset by a valuation allowance.
The Tax Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits, or E&P, through the year ended December 31, 2018.
The Company has calculated its best estimate of the impact of the Tax Act in its year end income tax provision in accordance with its understanding of the Tax Act and guidance available as of the date of this filing. Based on the preliminary calculation, the effects of the transition tax have been offset by the Company’s available tax credits in the United States. As the Company completes the analysis of the Tax Act, collect and prepare necessary data, and interpret any additional guidance, the Company may make adjustments to its initial assessment. Pursuant to Staff Accounting Bulletin No. 118, adjustments to the provisional amounts recorded by the Company as of January 31, 2018 that are identified within a subsequent measurement period of up to one year from the enactment date will be included as an adjustment to tax expense from continuing operations in the period the amounts are determined.